back to blog homepage

Open Sesame



The big news that should drive the stock market tomorrow is the initial public offering (IPO) of Alibaba (ticker = BABA), the Chinese internet company that looks to be 1/2 Google and 1/2 Ebay with some other stuff thrown in for good measure.

On its face, its growth numbers are impressive – much like the growth numbers for Facebook and Twitter (see charts above).

I’ve had CNBC on my computer today (with the volume off) and 80% of the times I looked at it, some talking head was on discussing the virtues of BABA and how it will shoot to the moon – much like we heard from the talking heads that talked about Facebook and Twitter.

I am a believer in both Facebook and Twitter as communication platforms, especially now that each has found some success in monetizing their product to bring in actual revenues. I also believe that the stock price of each will continue to grow nicely over time.

However, if you look at the charts above, you will see that after an initial push higher post-IPO, both stock prices fell to much better buy-in points.

We pulled the trigger and bought Twitter around $32 (now trading at $50 and have a gain of 55%) once our technical indicators showed that it’s correction had bottomed and once we were confident that they would be able to monetize their operations and book revenues.

We have not yet bought Facebook since it bottomed before we were confident in their ability to monetize their operations, but it is on our buy list for the next pullback. We would like to purchase Facebook at a more reasonable valuation (the P/E currently stands at 87 – we’d like it around 60 to 75 which can be explained – but maybe not justified – by its growth rate; its PEG Ratio stands at 2.22 – we’d like it between 1.5 and 2.0 to get us to a justifiable 60 to 75 P/E ratio; all of this translates into a purchase target of roughly $5 on either side of $62).

All of that being said, we are not in the market for BABA on the IPO. There is every chance that it will pull back to a better price than where it opens so that we can purchase it at a better valuation AFTER we perform our fundamental analysis on the company.

There are many people talking about this huge IPO marking a top in the market much like 2007. There is no way to know that – the Facebook IPO marked the beginning of a 6% correction in the S&P 500 Index – it is certainly possible that we could see a similar thing happen here when you combine it with the potential beginning of a Federal Reserve Interest Rate increase cycle and the unknown (as of this writing) results of the potential break up of Great Britain due to Scotland’s independence vote.

As I wrote yesterday, based upon a prudent investment management strategy we have raised a 3% to 5% cash position in most client accounts and will await a pullback to companies on our buy list at better valuations for an overall better total return and for risk management purposes.

As we move past the uncertainty of these news driven potentialities, we will have a bit more safety in the market.